“It is surprising how little attention has been paid by economists and by Wall Street to this development. The debt of corporations has expanded nearly fivefold while their profits before taxes a little more than doubled,” wrote Benjamin Graham in The Intelligent Investor.
What Ben Graham was referring to was the expansion of Net Corporate Debt from $140.2 billion in 1950 to $692.9 billion in 1969—a fivefold increase—compared to the expansion of Before Income Tax Profits from $42.6 million to $91.2 million—only a little more than double.
A fivefold increase in debt only to double profits is a hefty price to pay.
What’s scary is when interest rates go up. A fairly ordinary level of corporate debt will soon become prohibitively expensive to finance. That won’t exactly be welcoming news for stocks.
Latest posts by E.J. Smith (see all)
- How Many “Retirees” Will Keep Working?: Paying Their Kids’ Bills - April 25, 2019
- Your Survival Guy in Paris: Peking Duck - April 24, 2019
- Paris Update: Notre-Dame, Protests and Your Survival Guy - April 23, 2019